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Moody's Says Australia Vulnerable To External Shocks

SYDNEY--Australia is vulnerable to a global downturn and the government's pledge to return the budget to surplus will be challenged but the Australian dollar will still be partly supported by its emerging "safe haven" status, said Steven Hess, senior credit officer and the chief sovereign analyst for Australia at Moody's Investors Service. "Clearly, external developments are worsening the environment for Australia and other countries. In addition, the domestic non-resource sector has been experiencing rather slow growth," said Mr Hess in an emailed response to questions Tuesday. "The adjustment of the exchange rate that would normally be expected under such circumstances is being partly limited by the position of the Australian dollar, which has taken on at least some of the characteristics of a haven currency," said Mr. Hess. The Australian dollar has so far fallen 10% against the greenback from its 2012 highs but continues to trade around historically high levels. The pair last traded at US$0.9747. Some 75% of Australia's bonds are now held offshore as investors ranging from central banks to sovereign wealth funds flee Europe's debt crisis. The Reserve Bank of Australia, or RBA, meets later today and is expected to cut interest rates in response to a worsening global economic environment and concern that areas of Australia's economy outside mining are too weak to compensate for a feared slow down in mining industries. "For government finance, the strong investment component in the resource sector, which limits tax revenues, and the slower growth in the non-resource sector together mean that achieving a budget surplus in the coming fiscal year will be challenging, even though the government is committed to doing so," said Mr Hess. Australia's government has promised to return a budget surplus in the next fiscal year by reversing a deficit equivalent to 3.0% of gross domestic product, or GDP, to a small positive position. Some economists have described that plan as too ambitious given the current global uncertainty. Even if Canberra misses the surplus, the country's Aaa rating is strong and the government has fiscal flexibility, said Mr Hess. Net debt is projected to peak below 10% of national output, compared with just below 80% for the U.K. "Our rating does not depend on one year's performance but on our expectations for the medium term. In the short term, reliance on external funding remains a vulnerability, but in current circumstances this does not seem too serious a concern," said Mr. Hess. Write to Enda Curran at enda.curran@wsj.com

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